Econ chapter 2.8 (Price elasticity of supply) Flashcards
Define PES
The responsiveness of Quantity supplied to a change in price.
What is the PES figure always going to be?
positive- direct relationship between price and Qs
When will value of PES be >1?
When supply is elastic- quantity changes by a higher proportion than price
When will the value of PES be between 0 and 1?
When supply is inelastic- quantity changes by a lower proportion than the change in price
What is the calculation for PES?
Percentage change in quantity supplied
_________________________
Percentage change in price
What does elastic supply look like on a graph?
A shallow curve (positive) - shows that qS is relatively more affected than p
What does inelastic supply look like on a graph
Steep curve (positive) - shows that Qs is not responsive to price
What are the three determinants of PES?
-the time taken to produce it
-cost of altering its supply
-the feasibility of storing it.
What happens to PES when the product takes a long time to produce?
Supply is likely to be INELASTIC- producers are unable to respond quickly to a change in price
e.g aged whiskey, Christmas trees
What happens to PES when a product takes a short time to produce?
Supply is elastic- firms can quickly respond to price changes
What are two factors that contribute to the ease and cost of altering amount supplied
availability and mobility of factors of production
whether or not there is spare capacity in production
what happens if factors of production are immobile/unavailable?
if factors of production are immobile, Qs would be inelastic because firms can’t easily reallocate resources, so supply doesn’t respond quickly to price changes.
e.g If a factory relies on skilled labor that is difficult to relocate, it may struggle to increase production quickly
What happens if factors of production are mobile/available?
Qs is elastic - firms can easily reallocate resources, allowing them to increase supply quickly in response to price changes
e.g If a factory can easily hire more workers or switch machines for increased production, it can quickly increase supply
What does spare capacity refer to?
Spare capacity refers to the unused resources or production potential a firm has, allowing it to increase supply without additional costs if demand rises.
What does it mean for PES if there is spare capacity?
Supply is elastic- it can use up the spare capacity without additional costs
e.g A factory has extra machinery and workers available to increase production if demand rises
What does it mean for PES if there isn’t spare capacity?
Supply is inelastic
What happens to PES if the good can be stored?
PES is elastic- firms can hold stock and increase supply when prices rise.
e.g If a company produces canned goods, they can store extra stock and sell it when demand or prices rise
What happens to PES if the product can’t be stored?
PES is inelastic- firms must sell goods quickly and can’t build up stock to respond to price changes
e.g Fresh fruit, like strawberries, can’t be stored for long, so if prices rise, farmers can’t quickly increase supply
Why can consumers benefit from supply being elastic?
It means that supply is responsive to consumer demand. Sales may rise without there being a large increase in price
What do producers want their supply to be?
As elastic as possible- profits will be higher, the quicker and more fully they can adjust their supply in response to changes in demand hence price
What is the government likely to do and if supply is elastic?
giving a subsidy to producers- promote flexibility in production
e.g a lot of governments have made it easier for firms to hire and fire labour
